South Korea automotive

Key player – Hyundai Motor Group

Short-term performance at Hyundai and Kia will be hurt by vehicle recalls and a slowdown in key markets.

For the past few years Hyundai Motor and its sister company, Kia Motors, have missed sales targets owing to a slump in demand in emerging markets as well as slowing sales in North America and China, their largest markets. They have also had to contend with a shift in consumer preferences to sports-utility vehicles from sedans, the company's staple vehicle. Then there have been the labour strikes that stalled production at domestic plants, a series of major recalls, and political disputes between South Korea and China over the response to the nuclear threat from North Korea – with repercussions for Hyundai and Kia's Chinese operations.

All these factors have combined to slow growth at the once-booming Hyundai Motor Group, the two carmakers' parent company. With sales of 7.9m vehicles in 2016, the group fell short of its 8.13m target. Having sold a little over 8m vehicles in 2015, this was the carmakers' first fall in annual sales volumes in almost two decades. This is a far cry from the double-digit growth that the group achieved at the beginning of the decade. For the year ended December 2016, Hyundai's attributable net profit fell 16% to W5.4trn (US$4.7bn) while Kia's net income rose by 5% to W2.7trn.

Market position

Seoul-based Hyundai was established in 1967 as part of a leading family-owned chaebol, or industrial conglomerate, but didn't begin selling vehicles abroad until 1976. In the late 1990s, South Korean chaebol were restructured under severe economic pressure, and Hyundai, which means "modernity" in Korean, was split into five groups along industry lines. Hyundai took 51% of the then-bankrupt Kia in 1998, though this stake has since fallen to less than one-third.

Unlike other Korean producers, Hyundai has spurned affiliation with major global partners. Still independent, the Hyundai-Kia Group has emerged as one the fastest growing volume automaker over the past 15 years or so. It is the world's fifth-largest automaker by sales, a position it has held for a while.

The company produces passenger cars, sports utility vehicles, trucks, buses and commercial vehicles. It also manufactures machine tools and equipment and has a finance subsidiary. Its three vehicle plants in Korea include the Ulsan facility, the world's largest single automotive factory. It also operates plants and research centre in seven other countries, notably China, India and the US. Over 55% of Hyundai vehicles were produced abroad in 2012, compared to just 40% in 2008.

Hyundai and Kia retain a stronghold on their domestic market, together accounting for around three-quarters of the Korean market. Among foreign markets, China is the most important, with sales of Hyundai and Kia vehicles reaching 1.8m in 2016, 0r 22.5% of global sales. North America is not far behind in volume terms, with sales of Hyundai and Kia vehicles touching 1.4m units.

Corporate strategy

Hyundai-Kia rode the automotive sales rollercoaster of 2008-2011 extremely well, gaining sales on the back of low prices and reliability. Yet between 2011 and 2013, the group's rapid expansion slowed as it ran into problems in core markets. Automotive sales in Korea and Western Europe were on the decline, while fierce competition in the US eroded market share.

The South Korean auto group decided to hit the brakes and focus on quality instead. The new corporate strategy called for stability, rather than live-or-death fight for market shares and sales volumes. Hyundai worked to improve its image by associating its brand name with upscale vehicles. In this, it took a different route from the Big Three Japanese automakers, which created new marques for their luxury offerings. Even Kia made a foray into luxury - or at least an affordable variety - with the Kia Cadenza and Quoris.

In 2014, as growth continued to slow, the group focused its attention on raising margins and improving its models' much-criticised fuel efficiency. In 2015, Hyundai-Kia outlined a plan to spend W80.7trn by 2018. 60% of this amount was earmarked for the expansion of its plants, with the rest to be spent developing new models and building a new Seoul headquarters. The companies also decided to step up their collaboration and improve their brand positioning in a bid to fend off lower-cost rivals.

However, this strategy has not yielded the expected results and problems have persisted. Local manufacturers have been gaining ground against foreign carmakers in China by introducing cheaper models. Meanwhile, in the US, Japanese carmakers like Toyota Motor Corp have benefited from the yen's weakness to drive sales upwards. The firm's China operations were dealt a further blow this year amid the backlash in the country following the installation of an American missile defence system in South Korea. Hyundai and Kia are expected to reduce their production at their local facilities, a move that will hit sales.

In response to declining sales volumes, Hyundai and Kia are looking to expand their range of SUVs and launch at least ten new or upgraded models every year in the near term. They will also export more SUV models to markets like the US. However, the looming spectre of trade protectionism is making the group allocate more resources towards the local production of cars in the US. Earlier this year, Hyundai said it would invest up to US$3.1bn in its US production facilities between 2017 and 2021, with the construction of a new plant also mooted. The carmakers have made significant inroads into the US hybrid vehicle market this year, expanding their market share with the Niro SUV, which was launched in February.

At the same time, however, the group is reeling under the weight of vehicle recalls. In March, the South Korean carmakers recalled 978,000 vehicles in the US, citing the possibility that their seat-belts could detach in the event of a crash. In April, media outlets reported that Hyundai and Kia would recall 1.5m vehicles in South Korea and the US in order to fix a manufacturing defect in their engines. The recalls could dent the reputation that the Korean carmakers carefully built up by offering what were at the time far lengthier warranties than their rivals.

What to watch for

Hyundai plans to sell 5.08m vehicles in 2017 (it sold 4.91m in 2016) while Kia hopes to achieve sales of 3.17m (it sold 3.01m unit sales in 2016). Hyundai has big plans for the Indian market, with eight new launches pegged for the 2017-2020 period, including a compact SUV and a family-size hatchback. However, growth will continue to be subdued in China and the US, denting the firm's ambitions.

The group will also ramp up its research and development spending as it focuses on self-driving technologies and electric vehicles. According to media reports in March, Hyundai is developing an exclusive platform for electric vehicles, which is slated for completion in the near future. Hyundai and Kia plan on launching an electric SUV each next year, with the latter currently in the middle of developing its first fuel-cell powered vehicle.